Understanding Sales Tax Obligations

Sales tax is a consumption tax paid by the end customer at the point of sale. As a Shopify seller, you're responsible for collecting and remitting this tax to the appropriate state authorities. Shopify does not automatically collect sales tax for you, unlike platforms like Amazon or eBay. Therefore, it's crucial to understand where you need to collect sales tax and ensure compliance.

Determining Where to Collect Sales Tax

Identify Your Nexus

Nexus is a business presence in a state that creates a tax obligation. Nexus can be physical (e.g., an office, warehouse, or employee) or economic (e.g., a certain threshold of sales or transactions). Post-2018, with the South Dakota v. Wayfair ruling, many states now require out-of-state sellers to collect sales tax if they exceed certain sales thresholds.

Check State Requirements

Each state has its own nexus laws and sales tax rules. For example, Illinois requires you to collect sales tax if you exceed $100,000 in sales or 200 transactions in a 12-month period. Texas sets this threshold at $500,000 in sales. Always verify with the state’s taxing authority to ensure compliance.

Tax Sourcing Rules

Most states use destination-based sourcing, where sales tax is based on the buyer's location. However, some states use origin-based sourcing, taxing sales based on the seller's location.

Ensuring Product Taxability

Not all products are subject to sales tax. Generally, tangible personal property attracts sales tax, whereas services, digital products, food, groceries, and prescription drugs may be exempt or subject to different taxation rules. Check with state tax authorities or a tax professional to determine the taxability of your products.

Registering for a Sales Tax Permit

Before collecting sales tax, you must register for a sales tax permit in each state where you have nexus. Registration is usually free or involves a small fee. States use sales tax revenue for public services, so they require strict compliance. Collecting sales tax without a permit is illegal.

Setting Up Sales Tax Collection in Shopify

Tell Shopify Where to Collect Sales Tax

In your Shopify admin, go to Settings > Taxes and duties > United States. Choose the states where you need to collect sales tax and input your sales tax ID or FEIN.

Route to settings in the bottom right corner

Select Taxes and Duties then select region (United States)

to add the states where you need to collect sales tax and entered the required information select the "+ Region" option and add the relevant state

Categorize Your Products

Proper categorization ensures accurate application of tax rates. For example, clothing in Pennsylvania is exempt from sales tax. Proper categorization of products allows Shopify to automatically apply these exemptions.

To categorize products go back to the taxes and duties page for United States and locate the Tax rates and exemptions section and select Uncategorized products

On the following page select the product and assign a product category

Set Up Shipping Options

Shopify usually integrates shipping and sales tax collection. However, you may need to set up overrides for specific scenarios.

Specify Taxable Products

Go to Products > Add product and check the box "Charge tax on this product" for taxable items. Review each product variant to ensure accurate tax application.

From left hand panel select Products

Then select add product

Once the product has been selected toggle Charge Tax on this product

Add Warehouse Locations

In Settings > Locations, input your warehouse locations. This helps Shopify determine the correct tax rates based on the shipping origin.

Route to settings and select locations

Then on the Locations page select “Add location”

Handle Tax-Exempt Customers

For customers like resellers or nonprofits, collect and store their tax-exempt certificates. In Shopify, mark these customers as tax-exempt by going to Customers > Add customer and deselecting the “Collect tax” box.

On left hand panel select "customers"

Then on following page in the top right corner select add customer

When adding the customer make sure to deselect the "Collect Tax" option

Preparing and Filing Sales Tax Reports

Generate Sales Tax Reports

As your filing date approaches, generate reports detailing the sales tax collected from each state. Shopify Tax provides comprehensive reports breaking down sales by state, county, and local jurisdictions.

File Sales Tax Returns

File returns according to each state's requirements. Most states allow or require online filing. Filing a zero return may be necessary to show that you did not collect any sales tax during the period, even if you didn't collect sales tax.

Final Thoughts

Charging sales tax in Shopify involves understanding your obligations, registering in the right states, and setting up your store correctly. By following this guide, you can ensure compliance and avoid potential penalties. For further assistance, consider consulting a tax professional or using additional resources like Shopify’s Help Center and sales tax guides.